Arr Planner's (TSE:2983) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Arr Planner (TSE:2983) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Arr Planner, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.056 = JP¥532m ÷ (JP¥25b - JP¥16b) (Based on the trailing twelve months to January 2024).

Thus, Arr Planner has an ROCE of 5.6%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.

Check out our latest analysis for Arr Planner

Historical performance is a great place to start when researching a stock so above you can see the gauge for Arr Planner's ROCE against it's prior returns. If you're interested in investigating Arr Planner's past further, check out this free graph covering Arr Planner's past earnings, revenue and cash flow.

What Can We Tell From Arr Planner's ROCE Trend?

In terms of Arr Planner's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 15%, but since then they've fallen to 5.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Arr Planner's current liabilities are still rather high at 62% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To conclude, we've found that Arr Planner is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 48% over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing Arr Planner we've found 5 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

While Arr Planner may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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